Income Taxes

Arconic’s year-to-date tax provision is comprised of the most recent estimated annual effective tax rate applied to year-to-date pre-tax ordinary income. The tax impact of unusual or infrequently occurring items, including changes in judgement about valuation allowances and effects of changes in tax laws or rates, are recorded discretely in the interim period in which they occur. In addition, the tax provision is adjusted for the interim period impact of non-benefited pre-tax losses.

For the first quarter of 2018, the estimated annual effective tax rate applied to ordinary income was 26.5%. This rate is higher than the federal statutory rate of 21%, which was enacted by the Tax Cuts and Jobs Act ("the 2017 Act") on December 22, 2017, primarily due to additional estimated U.S. tax on Global Intangible Low-Taxed Income (GILTI) pursuant to the 2017 Act, domestic income taxable in certain U.S. states no longer subject to a valuation allowance, and foreign income taxed in higher rate jurisdictions.

For the first quarter of 2017, the estimated annual effective tax rate applied to ordinary income was 31.6%. This rate is lower than the federal statutory rate of 35% applicable to 2017 primarily due to foreign income taxed in lower rate jurisdictions, tax basis in excess of book basis of Alcoa Corporation common stock sold in February 2017, partially offset by a loss on the sale of a rolling mill in Fusina, Italy for which no net tax benefit was recognized.

For the first quarter of 2018 and 2017, the tax rate including discrete items was 28.1% and 33.5%, respectively. A discrete charge of $2 was recorded for the first quarter of 2018 and was primarily related to stock compensation. A discrete charge of $1 was recorded for the first quarter of 2017 and was primarily related to stock compensation offset by other prior period adjustments.

The tax provisions for the first quarter of 2018 and 2017 were comprised of the following:



	First quarter ended
	March 31,
	2018		2017
Pretax income at estimated annual effective income tax rate before discrete items	$	53	$	154
Interim period treatment of operational losses in foreign jurisdictions for which no tax benefit is recognized	1		7
Other discrete items	2		1
Provision for income taxes	$	56	$	162

On December 22, 2017, the 2017 Act was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a U.S. corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system, and a one-time transition tax on the non-previously taxed post-1986 foreign earnings and profits of certain U.S.-owned foreign corporations as of December 31, 2017. Also on December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118"), Income Tax Accounting Implications of the Tax Cuts and Jobs Act, was issued by the Securities and Exchange Commission to address the application of U.S. GAAP for financial reporting. SAB 118 permits the use of provisional amounts based on reasonable estimates in the financial statements. SAB 118 also provides that the tax impact may be considered incomplete in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the 2017 Act. Any adjustments to provisional or incomplete amounts should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period that the amounts are determined within one year.

In the fourth quarter of 2017, Arconic recorded a $272 tax charge for the impact of the 2017 Act’s tax rate reduction and one-time transition tax; the impact of both the rate reduction and one-time transition tax were provisional amounts in the 2017 provision for income taxes. No adjustments to these provisional amounts have been recorded in the first quarter of 2018. The impact of the rate reduction will be finalized as part of the filing of the 2017 U.S. income tax return during 2018. Arconic will continue to analyze the amount of foreign earnings and profits, the associated foreign tax credits, and additional guidance that may be issued during 2018 in order to update the estimated deemed repatriation calculation as necessary under SAB 118. Arconic has not yet gathered, prepared and analyzed all the necessary information in sufficient detail to determine whether any excess foreign tax credits that may result from the deemed repatriation will be realizable.

Provisional estimates of the impact of the 2017 Act on the realizability of certain deferred tax assets, including, but not limited to, foreign tax credits, alternative minimum tax credits, and state tax loss carryforwards have been made based on information and computations that were available, prepared, and analyzed as of February 2, 2018. Through March 31, 2018, there were no changes to the provisional estimates of the impact of the 2017 Act or the estimates used to evaluate the realizability of deferred tax assets. Further analysis, or the issuance of additional guidance, could result in changes to the realizability of deferred tax assets.

As a result of the 2017 Act, the non-previously taxed post-1986 foreign earnings and profits (calculated based on U.S. tax principles) of certain U.S.-owned foreign corporations has been subject to U.S. tax under the one-time transition tax provisions. In the fourth quarter of 2017, Arconic had no plans to distribute such earnings in the foreseeable future and considered that conclusion to be incomplete under SAB 118. There is no change to this conclusion through March 31, 2018.

The 2017 Act creates a new requirement that certain income earned by foreign subsidiaries, GILTI, must be included in the gross income of the U.S. shareholder. The 2017 Act also established the Base Erosion and Anti-Abuse Tax (BEAT). Arconic anticipates that it will be subject to GILTI and has included an estimate of GILTI in the calculation of the 2018 estimated annual effective tax rate. At this time, Arconic does not anticipate being subject to BEAT for 2018. During the first quarter of 2018, Arconic has made a final accounting policy election to treat taxes due on future inclusions in U.S. taxable income related to GILTI as a current period expense when incurred.